Written by Marcia Geltman, CPA, Partner
As the year comes to a close, all of us at Nisivoccia LLP want to wish you and your family a happy and safe holiday season. Though many of you will be busy planning for the holidays, the best gift you may give yourself might be to utilize some of the year-end tax planning tips.
This year planning is particularly difficult with the unknown impact of the tax reform proposals currently being negotiated in Washington. Though, for the most part, these changes will be effective for 2018 taxes, understanding the possible changes can help you make wise decisions at year end. The amount of proposed changes is significant. Below are just some of the items which might directly impact year-end tax planning.
All information provided by the Tax Foundation. According to the Tax Foundation website, the Tax Foundation is the nation’s leading independent tax policy research organization, helping improve lives through tax policy research and education that leads to greater economic growth and opportunity.For more information on the Senate’s 207 Tax Cuts and Jobs Act, click here.
The proposed tax changes for 2018 will result in higher standard deductions ($12,200 for individuals and $24,400 for married filing joint returns). In addition, there is the proposed $10,000 limit on real estate taxes. As a result, it may not be beneficial for you to itemize on your tax return beginning for the 2018 tax year.
If you may not be itemizing your deductions in the future, consider making charitable contributions by the end of this year. If you plan on making significant charitable contributions in the future, perhaps consider utilizing Donor Advised Funds. This will allow you to take the charitable contribution deduction in 2017 while deciding at some later date which charities to support.
Be sure to take your required minimum distributions from retirement plans if you are 70 ½ or older. If you haven’t taken the 2017 RMD, consider having it paid directly to a charity. You will not have to include the RMD in income and won’t need to itemize your return to get the benefit of the donation. This may be even more of a plus next year, since you may not benefit from itemizing your tax return.
Though the standard deduction would increase, both proposed bills go on to eliminate personal exemptions. However, the child credit would increase from $1,000 to $1,600. These credits would be subject to phase out at income thresholds, though the thresholds may be increased.
Consider paying for any employee business expenses (proposed these deductions will no longer be deductible after 2017) .
Prepay real estate taxes (proposed limit of $10,000 beginning in 2018). Consider paying fourth-quarter state estimated income tax in 2017 (proposal to eliminate deduction for state and local income tax beginning in 2018).
Allows mortgage interest deduction, but proposals may eliminate mortgage deduction for home equity debt.
The deductibility of medical expenses looks like it may survive. However, consider having any significant medical expenses taken care of by year end.
Any alimony payments incurred stipulated in divorce agreements entered into after 2017 may not be deductible. Finalizing any divorce agreements which include alimony payments by December 31st would benefit the payor. Of course, the opposite approach should be considered for alimony recipients.
The education credits would be simplified and the dollar limit on the credits would be reduced to $2,000. In addition, student loan interest would no longer be deductible. Consider prepaying tuition and student loans in 2017.
The bill also proposes lowering the tax rates for 2018. The Senate proposal includes 7 brackets ranging from 10% to 38.5% while the House proposal includes four brackets ranging from 12% to 39.6%. Postponing income until 2018 and accelerating expenses into 2017 may have even more of an impact this year than in the past.
The proposed bill would eliminate the tax credits on plug-in electric vehicles. If this is something you are considering to purchase, perhaps doing so in 2017 would make sense.
A big plus for many New Jerseyians is the proposed repeal of Alternative Minimum Tax. Since there is also a proposal to eliminate the deduction for state and local income taxes, as well as the limit on real estate tax deductions, this may not be as significant of a benefit as it appears. But for those who have the ability to exercise incentive stock options, consider waiting until 2018 to eliminate the AMT aspect.
The estate and gift tax exemption would double from the current $5,490,000 and eventually be repealed in 2023. Most important is that the step-up in basis upon the death of the decedent would be retained. No need to rush to do year end gifting.
Any casualty losses incurred resulting from recent hurricanes would be deductible without having to be reduced by 10% of adjusted gross income. The proposed changes may eliminate the deduction for all casualty losses beginning in 2018, other than those incurred in presidentially- declared disaster areas.
As always, consider harvesting gains on investments. Balance your gains and losses. Net losses are allowed only up to $3,000 per year with the balance being carried over to subsequent years (there is no carryover for New Jersey). Stocks sold at a loss cannot be repurchased within 30 days, but the same is not true for stocks sold at a gain. Therefore, if you have unused losses, sell appreciated stock and buy it back the next day giving you a higher basis for future sales without paying tax on the gain. There is no proposed change to capital gain rates under both House and Senate versions.
Max out on your retirement plan contributions.
In some cases, it might be worthwhile to accelerate income into 2017 and pay the NJ tax in 2017, since the New Jersey tax paid on the income would be deductible in 2017 but not in 2018. Make sure to look out for any AMT impact.
We prepare year-end tax projections for many of you, which are particularly helpful for those with fluctuating income. However, this year, please consider a 2017 tax projection to see how these proposed changes may impact your year-end decisions. Please contact your Nisivoccia partner to discuss.
A big bonus for passthrough entities. The proposal includes a maximum tax rate of 25% on the first 30% of income. One proposal includes a limit on the 25% tax rate to a percentage of wages. However, this reduced 25% rate doesn’t apply to most businesses involved in performing services. It is unclear as to whether the owners must be individuals, to benefit from this change. More details need to be provided.
In addition, the recent senate proposal establishes a 17.4% deduction for qualified business income from certain pass-through businesses (excludes service industries for individuals with income above certain thresholds).
The corporate tax rate would be a flat 20% and the corporate Alternative Minimum Tax would be eliminated. This would be good for higher income corporations, but bad for those who would have paid less than 20%. Depending on your specific circumstances, consider postponing income until 2018 and accelerate expenses into 2017.
Net Operating Loss deductions would be limited to 90% of taxable income and carryforward of losses would be allowed (no longer carryback losses to get immediate tax benefit)
Entertainment expenses would no longer be deductible.
Credit for employer-provided child care would be eliminated along with many other credits.
The current two-tiered excise tax of 1% and 2% would be replaced with a 1.4% rate.
As more information becomes available, we will keep you informed. Also, for more information on threshold amounts, please see our website at www.nisivoccia.com. Please do not hesitate to contact us with any questions at (973) 328-1825.
From all of us, please have a happy and safe holiday season and healthy new year.
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